The Short Answer
Losing your job during an active bankruptcy affects Chapter 7 and Chapter 13 differently. In a Chapter 7, the bigger concern is your ability to keep up with secured debts like a car or mortgage after your case closes — not the bankruptcy itself. In a Chapter 13, a job loss directly threatens your ability to make plan payments to the trustee, which means you need to contact your attorney immediately to explore a plan modification or conversion to Chapter 7. The sooner you act, the more options you have.
If you lose your job while in an active Chapter 7 bankruptcy or Chapter 13 bankruptcy, it may impact bankruptcy filing. If you are able to obtain unemployment benefits, you may be able to continue to meet your financial obligations. However, the impact of the loss of employment on each type of bankruptcy will vary.
Chapter 7 Bankruptcy
If you are in a Chapter 7 bankruptcy, the loss of a job may impact your ability to pay for a home, an automobile, or other assets. If you are concerned about your ability to continue to pay these debts, you should speak with your attorney about options available to you including surrendering or giving up the assets in your bankruptcy. The last thing you want to happen after completing a Chapter 7 bankruptcy is to have a repossession of an auto or the foreclosure of your home listed on your credit. Often, the auto finance company and the mortgage company will look for you to pay any deficiency balance, the difference between what you owe on the asset and what they sell it for at auction, after the sale of the auto or home. Again, the purpose of the Chapter 7 was to eliminate your debts and give you a fresh start, so a foreclosure or repossession and a deficiency balance is the last thing you need.
Chapter 13 Bankruptcy
If you are in a Chapter 13 bankruptcy, the loss of a job will most likely impact your ability to make payments to the Chapter 13 Trustee. As a result, you should contact your attorney to see if a modification of the Chapter 13 is possible. In some cases, the amount paid to unsecured creditors, including credit cards, medical bills, personal loans, etc., can be reduced. However, this is not always possible. In that case, you may need to consider whether it is in your best interest to surrender or give up an asset in the Chapter 13 bankruptcy. For example, some clients choose to surrender a car in their bankruptcy in order to afford the Chapter 13 payments and retain their home. In other cases, the Chapter 13, regardless of the modifications, is no longer feasible. In that situation, you should speak with your attorney to determine if converting to a Chapter 7 bankruptcy is an option for you. By converting to a Chapter 7 bankruptcy, you would be able to eliminate your responsibility for the majority of your debts. Again, you should speak with your attorney to determine the best option for your situation.
Key Takeaways
- In a Chapter 7 bankruptcy, a job loss won't derail your case, but it can leave you unable to keep up with car or mortgage payments after discharge — surrendering those assets inside the bankruptcy is far better than a post-discharge repossession or foreclosure.
- In a Chapter 13, missing plan payments can lead to dismissal, so contact your attorney right away if your income drops.
- Your Chapter 13 plan may be modifiable — the amount paid to unsecured creditors like credit cards and medical bills can sometimes be reduced to fit your new income.
- Surrendering a secured asset like a car inside the bankruptcy can free up enough cash to keep your Chapter 13 plan alive and protect your home.
- If modification isn't enough, converting your Chapter 13 to a Chapter 7 may let you eliminate most remaining debts and get your fresh start sooner.
- Unemployment benefits count as income in bankruptcy, so report them to your attorney immediately — they affect what options are on the table.
Attorney Insight
The mistake I see most often is Chapter 13 clients waiting too long to call us after a job loss — they miss one or two payments hoping things will turn around, and by then the trustee has already filed a motion to dismiss the case. Once your case is dismissed, you lose the protection of the automatic stay and creditors can immediately resume collection. In North Carolina, the Chapter 13 trustees — particularly in the Middle and Western Districts — move quickly on delinquent plans, so a single missed payment should trigger a call to your attorney, not a wait-and-see approach.
